The biggest lender

Either banks evolve, or they will die, like dinosaurs...Maybe the same could be said for old-school treasurers.

Jardine Mattheson’s former group treasurer* shares his disappointment with bank lending in the modern world, how he views alternative credit sources, and how technology could revolutionise fund raising. Ann Shi reports

“I predict that my company’s biggest lender would not be a bank in 30 years from today.” These are the words of Adrian Teng, the former group treasurer of Jardine Matheson and now group finance director of its subsidiary Jardine Cycle & Carriage.

Although, he isn’t certain who will be the primary source for funding, Teng is clear it will come from alternative credit sources: either the capital markets, non-bank organisations such as asset managers, as well as FinTech companies like Ant Financial. “The key point is that banks should not be the core credit source alone,” he said.

This is already happening to some degree. Debt capital markets (DCM) have surpassed bank loans as the primary source for corporate funding in Asia, according to Dealogic. In 2015 in Asia, DCM borrowings represented 42% of corporate funding mix, with loans taking 37% and equity capital markets (ECM) 21%. In 2011, loans were the primary source for funding, taking 48% of corporate funding mix, while DCM has only 35% and ECM 17%.

A source for Teng’s comments comes from the pain of executing a standard bank loan transaction in today’s climate.  “Whenever we do a financing transaction [with banks], it tends to be very long and tedious,” Teng said.

Financing for the company’s subsidiary level, for example, could easily cost Teng two months to establish a credit facility with a bank. “There are instances where financing can take six to 12 months,” Teng added.

Bank tedium

Many of us are conscious that the lenders themselves are not entirely to blame; at least not in isolation. The current regulatory environment has thrown the financial system off-kilter. Many global banks are more interested in increasing the profitability of existing clients through cash management, trade finance, foreign exchange, financial advisory, rather than building up a new client base.

In Teng’s view, the tedium of banking is also down to a complete lack of transparency in the bank lending process. But what’s new? Banks have never been transparent about this information. In some cases, key relationship managers might not know themselves and it is clearly not in their interests to openly part with their credit evaluation process. For many treasurers a truly open dialogue is as far away as it has ever been.

Teng believes it doesn’t need to be this way. In his mind, banks that continue to keep their cards close to their hand will surely go the way of the Dodo. “Banks would be wrong if they still think they have this secret information that differentiates themselves from others.”

He explained that the regulatory scrutiny on banking sector will eventually, if not already, take away any differentiating factors. When dealing with regulations that are not clearly defined internationally– nor consistent across borders – banks tend to over compensate to make sure all the boxes are ticked. And “the cost of regulatory compliance and legal is so expensive that…banks don’t make the money by pure lending,” said Teng.

Ultimately, however, Teng believes that technology will drive banks away from their traditional banking model, if it hasn’t done so already. After a recent trip to Silicon Valley, Teng opened his eyes to the power of digital innovation in the world of finance.

Bid and click

One idea Teng came up with is the creation of a centralised two-way information exchange portal system for credit owners and borrowers. Simply put, the portal would connect potential borrowers and lenders together through a platform, similar to an exchange.

So, when a company needs funding, a treasurer or finance executive can go to the portal, list out the necessary information such as borrowing amount, tenor, requirement and borrowing entity. Interested lenders, be it banks or non-bank institutions, can access those information via the portal and accordingly list out their pricing and terms, which are only seen by the borrower. Based on all the “bids”, the treasurer can have a quick view of the liquidity availability and cost out there, and filter out the best offer.

“There are entities with excess capital. For example, insurance companies, asset management companies, and corporates such as Google or Apple sit on billions of cash”

For banks, Teng argued, they can also save the costs of “having an army of middle office and back office people” supporting a loan negotiation and documentation, assuming they are willing to participate. Even if they don’t, anyone with excess capital should be able to access the portal, potentially creating a larger pool of liquidity. 

“There are entities and organisations that have excess capital. For example, insurance companies, asset management companies, and corporates such as Google or Apple, sit on billions of cash,” Teng summarised.

The interest is there. In fact, some non-bank institutions are already putting their money into peer-to-peer (P2P) lending – although this is fraught with risks. A 2014 The Economist review found that only a third of the money coming to Lending Club, a P2P financer, was from retail investors while the rest and the fastest-growing slice came from rich people and institutions.

Additionally, in some industries there are already some direct lending channels. According to Brian Edmondson, head of transaction banking sales at Misys, the motor manufacturing industries are handy at setting up their own P2P lending marketplaces. “Some of the more dominant companies are quite happy to provide financing to the suppliers,” he said.

But even for non-bank lenders, they still need to conduct due diligence on the borrowers on the platform. Robert Yenko, a treasurer at Intel, said a lot of legal and documentary requirements would be inevitable in the due diligence process before on-boarding, which would be an obstacle for corporate lending platforms.

Yenko viewed Teng’s suggestion as a “novel idea” but suggested the portal could start off as an “FXall for loans” (FXall is a Thomson Reuters platform of FX trading for institutional and corporate clients), a marketplace where lenders bid for the best pricing of loans to corporations. Eventually, it should morph into a real P2P lending platform where any lenders can bid for a loan to a borrower of their choice, after due diligence has been fulfilled, said Yenko.

Gregory Gibb, chairman and chief executive officer at Shanghai Lujiazui International Financial Asset Exchange, an online P2P marketplace for financial assets trading, listed some likely challenges in developing such an independent “P2P for corporates” platform.

• How to build a large enough two-sided network and keep it intact as it grows. Once corporates interact on the network, it is very easy for them to conduct bilateral deals outside of the network.
• It would need to operate in an environment where corporate transparency/ratings are sufficiently trusted, which could be more challenging in developed markets.
• It would require a sufficiently large institutional investor base to support lending. Would this be feasible in China, for example, where few large institutions are fully private?
• “A platform that exists between large buyers and sellers often sees its margins quickly squeezed,” said Gibb.  “I imagine it being built out first in industry clusters, say 100 companies in a vertical that know each other agree to lend…Once verticals are built in several sectors it could create cross-sector opportunities.” 

Unstoppable

Teng knows there will be challenges and failures, but views it “an unstoppable trend” that companies and their lenders lean towards transparency, with technology providing the hook. “The real challenge is people’s mindset. Everything else is possible,” said Teng.

But transparency works both ways. How open would companies be in turning over their books? Interestingly Teng acknowledged that they won’t be, but felt that the option will soon be out of their hands. “If the world is moving towards that level of transparency with technology, can I stop it? I might as well gather the benefits of it.”

The real challenge is people’s mindset. Everything else is possible

Future of banking

Regardless of its feasibility, the lending portal concept is just one of the many possible ways by which technology could eventually change the way how banks conduct business.

Damian Glendinning, treasurer at Lenovo, has recognised bank lending is reducing in importance as a means of funding companies. “This has already happened to a large extent in the US [and Europe], and I expect Asia will follow over the next ten or 20 years,” he said.

Glendinning said in the future the capital markets would replace banks, with products such as bonds and commercial paper programmes, as well as crowd funding, and factoring portals.

Does this mean the world’s major lenders will all essentially become investment banks? Hopefully not, but should banks look to focus their attention on value-added transactional services, as Teng said? Maybe.

If embraced correctly, digital innovation can bring significant upside for banks

With challenges come opportunities. In a recent research paper, Boston Consulting Group (BCG) told the banks to embrace technology. Take trade finance as an example: “If embraced correctly, digital innovation can bring significant upside for banks…Such technology has the scope to reduce operational and compliance costs of paper-based trade by 10% to 15%, provide a platform to grow revenues by 5% to 15%, and help banks capture strategic advantage going forward.”

But banks must move fast. Goldman Sachs reports that alternative lending could put an estimated $11 billion in banking sector profits at risk through 2020. Almost half (46%) of private funding for fintech start-ups by 2015 was for lending services, which currently account for 56% of the profits generated by the US and European banks, according to Citi’s March report ‘Digital Disruption’.

The change agenda is daunting and reaches far beyond just lending. Examples BCG named include payments and financial-supply-chain solutions (Square; Tungsten), financing (Google-backed OnDeck Capital; Amazon), and foreign exchange (OzForex).

Banks know the threat they face. While “incumbent financial institutions still have the upper hand in terms of scale… Given the growth in fintech investment, this isn't likely to continue for long,” Citi recently acknowledged. In China, for example, transformation to digital financial flows has been “breathtaking” with 96% of e-commerce sales done without a single bank’s involvement, the US bank estimated.  

“Either banks evolve, or they will die, like dinosaurs,” warned Teng. Maybe the same could be said for old-school treasurers.

*The interview was conducted in January. Adrian Teng moved to JC&C as its finance director in April. The report was written in January, revised in May, and printed in June.